Ross Stores Inc. Downgraded To 'BBB+' On Performance Challenges Stemming From The Coronavirus Pandemic, Outlook Negative

  • We expect the effects of the coronavirus pandemic, including the mass store closures and weak global economy, to severely reduce consumer spending this year.
  • We believe Ross Stores Inc.'s operating results will be significantly weaker than we previously expected due to the store closures and macroeconomic uncertainty as well as its lack of an omni-channel presence.
  • We are lowering all of our ratings on Ross, including our issue-level ratings, to 'BBB+' from 'A-'.
  • The negative outlook reflects the risk that we will lower our rating on the company if a prolonged disruption in consumer spending causes us to reassess its operations and financial position.
NEW YORK (S&P Global Ratings) March 27, 2020--S&P Global Ratings today took the rating actions listed above.
We expect the company's operating results to be severely pressured.  In response to the coronavirus pandemic, Ross announced it will temporarily close all of its stores through April 3, 2020. However, we believe it may extend the closures beyond this date given the increasingly drastic actions governments are taking to arrest the rapid rise in COVID-19 cases. For fiscal year 2020, we now forecast that Ross' revenue will likely decline by more than 20% and expect its EBITDA margins to weaken significantly. In addition, we believe the company's recovery in 2020 will be slow, especially for discretionary categories such as apparel, as economic concerns and uncertainty linger. We also believe the store closures will lead to temporarily elevated levels of cash burn. However, we view the company as having sufficient liquidity to weather these conditions.
The negative outlook reflects the heightened uncertainty around the effects of the coronavirus pandemic and the impending global recession on Ross' operating and financial conditions. A prolonged store closure coupled with a slowdown in consumer spending could negatively affect the company's ability to restore its operations and maintain its financial position.
We would lower our rating on Ross if the pandemic leads consumers to move away from its treasure hunt-style in-store experience and toward online shopping, reducing the company's traffic and market share. This would lead us to take a less favorable view of the company's competitive position. We could also lower our rating if there is a material change in the company's financial position such that we expect it to sustain leverage of 2.5x or above.
We could revise our outlook on Ross to stable if the company recovers from the effects of the coronavirus and we are confident that it can maintain its appeal to consumers in a recessionary environment. Under such a scenario, the company's sales and earnings would begin to rebound in the second half of the year and return to sustainable growth in 2021 while it maintains adjusted leverage of about 1x on a consistent basis.
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